Bank of America claims MBIA in default on senior notes

Thu Dec 13, 2012 8:31pm EST

A sign for a Bank of America office is pictured in Burbank, California August 19, 2011. REUTERS/Fred Prouser

A sign for a Bank of America office is pictured in Burbank, California August 19, 2011.

Credit: Reuters/Fred Prouser

(Reuters) - Bank of America Corp (BAC.N) raised the stakes in its ongoing legal battle with bond insurer MBIA Inc (MBI.N) on Thursday, saying MBIA was in default on some of its debt and filing a lawsuit related to changes in that debt.

In a statement, Bank of America said it purchased $136 million worth of the 5.70 percent senior notes due 2034 in a tender offer and that it had issued a notice of default to the company and the trustee for the notes.

According to Thomson Reuters data, there are $329.1 million in notes outstanding from the bond issue in question.

"MBIA believes that Bank of America's purported notice of default is meritless and as a result has no force and effect under the terms of the indenture," an MBIA spokesman said in an emailed statement. He termed the move "a transparent attempt to gain leverage to force MBIA Corp. to accept a discounted settlement of the over $4.5 billion that BofA owes MBIA Corp. for fraudulent and misrepresented mortgage loans."

A source familiar with the matter, speaking on condition of anonymity, said Bank of America also filed suit against MBIA in a New York state court, alleging MBIA interfered in Bank of America's offer to buy the bonds. As of Thursday evening the suit was not yet publicly available.

At issue is a change MBIA sought to make to the terms of the bonds to eliminate the risk that it might be considered in default if a troubled unit were put into rehabilitation or liquidation by New York regulators.

MBIA said in early November that if there were a default, it would have insufficient liquidity to make good on the notes and would probably pursue other actions, including bankruptcy.

Bank of America countered with an offer to buy the bonds, saying it believed the changes would increase the risk of MBIA's insurance unit being placed in rehabilitation or liquidation, which could jeopardize all policyholder claims.

On November 26, MBIA said it won the necessary consent to make the changes, but Bank of America said on Thursday it issued the default notice because of "the purported adoption of a proposed amendment in violation of the terms of the Indenture."

The legal wrangling is a major cloud hanging over both companies, which have struggled to recover from mortgage-related troubles from the financial crisis.

MBIA claims that Bank of America owes it billions of dollars over soured mortgages that it wants the bank to buy back. Bank of America says the insurer owes it billions over certain credit default swap transactions.

The two sides are currently in court in pretrial hearings in MBIA's 2008 breach of contract lawsuit against Bank of America subsidiary Countrywide for misrepresenting the quality of loans it insured.

(Reporting by Karen Freifeld in New York and Rick Rothacker in Charlotte; Writing by Ben Berkowitz; editing by Andrew Hay and M.D. Golan)

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